Payday Loan vs. Personal Loan

Payday loans are often frowned upon as a solution to help with finances until your next paycheck. Payday loans are designed to be about the size of the borrower's paycheck. The loan is usually due in two to four weeks after the loan is dispersed. Where payday loans can prove especially damaging is the extremely high interest rate. Currently, the rough average of payday loans is somewhere around 400% ARP, with many going above 1000% APR. Payday loans may be the right solution for some who need a cash advance, but many continue to defer payment which can increase the interest astronomically. Take a look at this example.

On a payday loan, if you were to borrow $1,000 for one month, you would have to pay back $1,333.33. The total interest for one month would be $333.33.

Now imagine after the initial month, that the borrower decided to keep the loan for another month. The total interest would be now be $777.63. After only two months, the interest owed is nearly 80% of the loan amount. This process continues to spiral out of control making it nearly impossible to catch up. By the third month the total interest owed is over 130% of the initial loan amount.

Although payday loans are not designed to span multiple months, it can be a very hard loan to tackle and becomes a financial burden.

Personal loans are a much more viable option to tackle debt, finish a home project, pay off credit cards, pay off student loans, etc. with lower interest rates than most credit cards.

With the high interest of credit cards, consumers are starting to look elsewhere to the ordinary credit solution. According to CreditCards.com, the average American household carries nearly $15,910 in credit card debt, of those that have a credit card. Consolidation and installment loans have helped personal loans emerge as a relatively new solution to help consumers get rid of their debt at a much lower interest rate.

Best Egg shares the following example of why personal loans are a better choice to get to get out debt and better your financial situation. If a consumer carried two credit cards with $10,000 on each card with rates of 14% and 18% APR, the total interest paid in 28 years (minimum payments) would be over $25,000. Here is where personal loans come in. The same consumer could apply for a personal loan in the amount of $20,000 for three years with a 5.99% APR would result in interest totaling to $1,901. The savings is over $23,000 in interest paid.

Many personal loan companies aim to help consumers get out of debt at a much lower rate than credit cards.

While both payday loans and personal loans are different in nature, personal loans do not carry the danger that payday loans can present. In fact, personal loans are sometimes the best option to better your long term financial situation.